Arthur YUEN, Deputy Chief Executive of the Hong Kong Monetary Authority, talks about how the HKMA as a banking supervisor, an investor and a facilitator, drives and promotes sustainability in the banking sector and beyond.
There is no doubt that climate change will become a global issue that needs to be tackled head-on in the coming decade. Every jurisdiction will have a responsibility to help contain the rise in global temperatures, and Hong Kong can play a big part in this, according to the Hong Kong Monetary Authority (HKMA).
“Hong Kong is a major international finance center, and we have the infrastructure available to help promote green finance,” says Arthur Yuen, Deputy Chief Executive of the HKMA. “It is important for us to leverage that infrastructure if we believe that financial intermediation is a tool to promote climate change and sustainability concerns.”
With Mainland China to its north, and its standing as home to a wide network of funding sources, Hong Kong is in a position to play an intermediary role in the process of greening the financial system.
“China has many green projects and sustainability projects, and these will generate investment opportunities for the rest of the world. So Hong Kong needs to bridge the gap between the world and China,” Yuen says.
It is expected that it will cost China around 100 trillion yuan (US$15 trillion) over the next three decades to meet the targets arising from its recent commitment to become carbon neutral by 2060, according to research released by the Boston Consulting Group in October 2020. The Central Government will need to get private investors on board, and this is where investment opportunities will be huge.
Yuen says that many investors will still prefer to go through Hong Kong. “We had better get prepared to take advantage of these opportunities,” Yuen says.
Ready to help
The HKMA is already poised to help, as a banking supervisor, an investor, and a facilitator.
As a banking supervisor, the HKMA’s job is to ensure that banks are fully aware of the various financial risks posed by climate change. It must also give banks advice about managing these risks.
It would be prudent for banks to consider how to manage their business in the light of these risks. Yuen points out that banks are already facing two specific risks, namely physical risks and transitional risks.
In terms of physical risks, natural events like Typhoon Mangkhut can have a real effect on the value of collateral. For example, if a property is prone to typhoon damage, and banks are offering loans using that property as collateral, the risk is greater.
Then comes a more long-term and more significant transitional risk. As society begins to move to a lower carbon footprint, the ensuing changes will require new technologies that may make some traditional industries obsolete. The plastics industry may be one of these industries, for instance. While some banks will benefit, the risk exposure remains high for those banks who are lending to companies who may become obsolete in the long run, and therefore won’t be able to repay their loans.
“Banks are traditionally more capable of managing short-term risk than longer-term risk,” Yuen says. Moreover, translating such risk into real quantifiable terms is no easy feat.
Banks need to translate these risks into monetary metrics that help them to understand the risk in dollars and cents. For banks to manage such risk using numbers, they need to find a way to quantify the physical and transitional risks and translate them into a manageable type of structure. This takes a lot of time. “As a banking supervisor, we have to make sure that the process is accelerated as quickly as possible,” Yuen says.
A green point of view
Yuen says that it is equally important that the supervisory process itself is attuned to a green point of view, and that must take the risks posed by climate change into consideration. In other words, considerations relating to sustainability need to be part of the supervisory process.
The role that the HKMA plays as an investor is also important in promoting green finance. Through the management of the Exchange Fund, the HKMA can play an important role in promoting sustainable finance by adopting a responsible investment mandate.
For example, Yuen says that if there are two projects on the go, and one is greener than the other, if the long-term risk adjusted return is similar, “we would give preference to the greener project, and this is our responsible investment mandate,” he says.
Yuen says that the HKMA requires its external managers to comply with the 2016 SFC Principles of Responsible Ownership. This encourages investors to determine how best to meet their ownership responsibilities.
The HKMA has been working with the International Finance Corporation to address climate change for several years. Its most recent venture, announced in November, is to encourage commercial banks in Asia to adopt strategies and targets which will enable them to become greener.
“It’s an exciting project because of its regional perspective,” Yuen says. “It provides research capability insights into the green agenda, it provides guidance on building capacity, and it gives practical guides to commercial banks to make green finance and sustainable finance the core business going forward.”
The HKMA also functions as a facilitator. Yuen says that the entire financial system in Hong Kong needs to acquire more information and knowledge about green finance. The HKMA can help to facilitate this process by undertaking more research and sharing its findings with the industry. It can inform about international trends and provide guidance.
Universities play a role
As an Advisory Council Member of the HKUST’s School of Business and Management, Yuen says this is where the expertise of universities like HKUST is needed, such as enhancing the risk modelling capacity. “We try to hit the biggest pain point of the industry while pushing a green and sustainable finance agenda,” he says.
There are several pain points. The proliferation of standards is one, the lack of centralized data is another, and the lack of know-how and training in education systems is yet another.
Yuen says that risk due to climate change is very different to traditional risk. It is more forward looking, it is longer term, and it is less quantifiable and less supported by research in terms of quantification. So the field needs people who have financial know-how as well as an understanding of climate and environmental science.
That’s where an institution like HKUST, which has a focus on both science and business, can fill the gap. “We need modelling experts who can translate climate risks into financial risk models. I think we are facing a very big shortage of such experts globally,” Yuen says.
“China has many green projects and sustainability projects, and these will generate investment opportunities for the rest of the world,” says Arthur Yuen, Deputy Chief Executive of the HKMA.
Measures to Drive Green Finance Locally and Globally
The Alliance for Green Commercial Banks - The HKMA has signed a new partnership with the International Finance Corporation (IFC), a member of the World Bank Group, to encourage commercial banks in Asia to adopt strategies and targets to become greener. It is the first partner to work with the IFC on this initiative. As the founding member and first regional anchor for the Asia Chapter of the Alliance for Green Commercial Banks, the HKMA will serve as a hub for green finance among commercial banks in Asia.
The Alliance for Green Commercial Banks - The HKMA has signed a new partnership with the International Finance Corporation (IFC), a member of the World Bank Group, to encourage commercial banks in Asia to adopt strategies and targets to become greener. It is the first partner to work with the IFC on this initiative. As the founding member and first regional anchor for the Asia Chapter of the Alliance for Green Commercial Banks, the HKMA will serve as a hub for green finance among commercial banks in Asia.
Central Banks and Supervisors Network for Greening the Financial System - The HKMA is a member of the Central Banks and Supervisors Network for Greening the Financial System (NGFS). Members of the system contribute to the development of environment and climate risk management in the financial sector, as well as to mobilize mainstream finance to support the transition towards a sustainable economy.